Cincinnati Financial Corporation

2009 Second-quarter Letter to Shareholders

prev

next

August 19, 2009

To Our Shareholders, Friends and Associates:

With an operating loss of $5 million for the second quarter and an operating gain of only $32 million for the first six months, 2009 is shaping up to be worse than we forecast.

Growth of book value per share rebounded in the second quarter, adding to our balance sheet strength. However, our income suffered the one-two punch of some broad external forces — a weak economy and a soft insurance market — and some stubborn line-of-business issues including catastrophe impact on our homeowner line and loss cost inflation impact on our workers' compensation line.

The economy and market are cyclical and need time to recover. Likewise, it will take time to fully realize the benefits of the actions we've taken to improve performance for those lines of business. While your company has always focused on creating value over the longer term, we are not sitting idly by expecting time to do all of the work.

A transformation is taking place in several business areas over recent quarters as we work to preserve capital, drive growth and improve profitability. By embracing the principal of diversification, we are increasing our opportunities and assuring we are prepared to grow profitably when the time is right. We believe progress in these diversification efforts will substantially reduce risks to our financial stability and substantially strengthen some competitive advantages. In the pages that follow, you'll read details of the efforts summarized here:

• We rebalanced our investment portfolio and diversified our equity holdings, applying our new parameters on an ongoing basis to avoid future concentrations in any investment sector or security issuer. This diversification helps stabilize our capital even as we continue driving shareholder value through our equity-investing approach: our equity portfolio managers seek a balance of current dividend income and the potential for appreciation, which together add to shareholders' equity over time.
  
  
• We continue to make progress in our initiatives for geographical expansion and technology upgrades, providing further diversification and growth opportunities. This will gradually spread risk geographically and should reduce volatility in catastrophe loss ratios affecting homeowners and other property lines of business. Our updated personal lines administration system is on track to deploy in early 2010. In its advent, we have prepared by appointing agencies in four new personal lines states in 2008 and 2009 and expanding our product offerings or automation capabilities in three other states. This next generation system and our improved rate structure set the stage for our new personal lines agencies to grow into meaningful contributors.
  
  Also, we issued the first policy from our new commercial administration system for commercial package and auto policies in July and will deploy it to agents in 11 states by year-end. It offers a new option for agents to have us directly bill their clients. With these tools just around the corner, we opened Texas and Colorado for commercial lines in recent months, both far from our Midwest roots and concentrated catastrophe exposures.
  
  
• Finally, we've added significant diversification to our revenues and product line, creating more opportunity to meet more of the insurance needs of businesses in our agents' communities. Our surplus lines subsidiary launched in 2008 has contributed nicely to our increase in new business in 2009.
  
  

In all of these initiatives, we retain and emphasize the strengths that support our agent-centered mission. These include a conservative financial approach, sound and disciplined underwriting judgments and reliance on the local knowledge of our agents and field staff. Unsatisfied with our current results, we are making the changes that prepare your company to broaden our tools, our reach and our opportunities.  

Respectfully,

/S/ John J. Schiff, Jr. John J. Schiff, Jr., CPCU Chairman of the Board

/S/ Kenneth W. Stecher Kenneth W. Stecher President and Chief Executive Officer

This report contains forward-looking statements that involve potential risks and uncertainties. For factors that could cause results to differ materially from those discussed, please see the most recent edition of our safe harbor statement under the Private Securities Litigation Reform Act of 1995. To view or print the edition in effect as of this report's initial publication date, please view this document as a printable PDF.

prev

back to top

next